Does size matter?

Businesses are getting smaller, and industry sectors are increasingly intermingling. What is emerging are models of co-dependent networks, and the SMEs that survive and thrive will be the ones that recognise this. MARK JAMES reports.

By Mark James

Efforts to understand the future of the SME business sector of the economy are commonly undertaken, with varying degrees of success. But questions that are rarely, if ever, asked are: “Does size really matter? Will it make sense to talk of business sectors in the future?”

The answer to both is: “Probably not.”

Analyses of markets in terms of enterprise size and population or age demographics were common in the industrial era, when mass market products were sold according to how the “mass” was divided up.

But in the post industrial era, conventional demographics are losing their relevance. Instead, divisions based on considerations such as the type of consumer experience, people’s time habits when working and when and where people choose to work will provide a better understanding of the business future than industrial-era segmentations such as product types or business size.

Even the big companies are tending to get smaller, as they employ various configurations of outsourcing, offshoring and alliance creation. It is becoming harder to tell where enterprises start and finish.

Instead, many of the big firms are becoming what the US management thinker CK Prahalad calls “networks of co-creation”. They position themselves at the centre of networks comprised of other enterprises and stakeholders, many of which are SMEs.

The chief executive of IBM Australia and New Zealand, Glen Boreham, argued recently that new forms of organisations are emerging, a “highly responsive, globally resourced enterprise that doesn’t even think of itself as an organisation – instead as a network.”

What Boreham describes is not really enterprises. Yet has there ever been an analysis of SMNs – small and medium networks?

SMEs will of course continue to exist, but the environment in which they operate will profoundly alter. Many of the old divisions and boundaries will dissipate, while new ones will emerge. Boreham says: “People are connected by technology – but that’s not the point. The point is a community of people can now work together in a very powerful way without the command-and-control organisation of a traditional enterprise.”

Boreham selects eBay and the open source community as examples of the new business terrain, in which new forms of entrepreneurialism are springing up. As IBM collaborates with these networks, new types of management are required.

“All of a sudden you’re trying to manage a complex and ever-changing network of individuals – many of them not your direct reports or even employees of your company,” Boreham says. “In that situation, command and control doesn’t work. You need individuals to self-regulate, to be responsive and efficient. How do you get a network of individuals to act together, as one? Just like a collaborative community: you give them a common purpose.”

One division that will blur is that between the work place and the home. Jane Shelton, managing director of the consultancy Marshall Place Associates and an expert on home-based business, says the growth in home-based businesses is “phenomenal”, about 55% of the SME sector.

Shelton says many people are adopting a portfolio way of managing their lives. “One example is a person who had an online spice company selling chillies. She sold out. From her perspective, it was the fifth priority in her life, but she was able to manage it because of the interactivity of the net, sourcing different chillies from different regions.

“You are able to decide when you are working,” says Shelton. “If you are distributing things in the United States or the United Kingdom, you are having to work very different hours.”

A further commonplace of the industrial era that will fade is the idea that it is necessary to have a career. Shelton says people in the future will derive their sense of identity more from building businesses (SMEs) than building careers.

What, then, are some likely trends in Australia?

One thing that is certain is that the SME sector will be volatile; there will be a constant process of start ups and closures in which about half will fail. The overall growth can be expected to be about 80% more than the average of all other business.

Those companies that start up because the founders believe they see an opportunity will tend to grow about three times faster than businesses that are responding to necessity.

Kevin Hindle, professor of entrepreneurship research at the Swinburne University of Technology, says Australia is strong on participation in SMEs, with about a fifth of the working age population either starting up an enterprise, considering doing so or developing one – the highest level in the OECD.

According to Hindle, Iceland comes second among the developed nations, with a level of people engaged in business ownership of only 11.3%. The United States has 10%, Britain 5.8% and Belgium 2.7%.

Australia, in short, is well out in front among the OECD countries when it comes to SMEs, although this probably means that there will not be a sharp increase in penetration. High levels of participation, however, does not necessarily indicate vibrancy; there is evidence of a lack of ambition with Australian SMEs. Local SMEs do not fare so well on measures such as innovation and growth orientation (although the latter is improving).

Another clue to how the SME sector will develop is gained by looking at the five types of entrepreneurs that typically appear. Individuals escaping corporate life, family business people mobilising internal labour, businesses based on specialist technologies, inventors and creators of novel products, and professionals who provide services to the sector.

Many of these business people will continue to adopt industrial-era practices, and achieve only modest outcomes, at best. Family businesses, for instance, are likely to be arranged in the same way as traditional family businesses. Many escaping corporate life are likely to pursue older-style of businesses (“opening a third sandwich store in a shopping strip that can only sustain two”, says Hindle). Hindle says it is difficult to sell such businesses without incurring financial loss.

But for would-be entrepreneurs who look for new types of enterprises, and exploit technology to take advantage of the dissolution of conventional boundaries and the traditional habits of industrial-era business, the outcomes are likely to be very different.

The clue is to think less in terms of products, conventional segments, career or lifestyle, and concentrate instead on areas such as networks, co-creation and the flexible use of time.

The Brazilian management thinker Ricardo Semler has famously commented that people should learn to play golf on Monday. He did not mean that people should be more lazy.

He meant that the true challenge in business is to question everything, especially industrial-era practices such as rigid hours of work, traditional organisational hierarchies and the pursuit of price efficiencies with mass market products.

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